U.S. outlook for 2022.

• Author: Witte, Willard E.

A year ago, we expected that 2021 would continue the economic recovery from the government-mandated COVID-19 shutdown that ravaged the economy in the spring of 2020. This has been the case. We also expected that this recovery would decelerate from the historic third quarter 2020 surge. This has also been the case.

In the four quarters since the huge swings in mid-2020, output has grown at an average rate of 4.9% (see Figure 1). This represented good growth--enough to surpass the pre-pandemic peak during second-quarter 2021 -- and is about in line with our expectation a year ago.

At the disaggregate level, we were also mostly correct. Consumer spending has been stronger than we anticipated, even though there was (as we expected) a shift toward purchases of services. Our error was that consumer spending on goods was much better than we expected, perhaps due to additional stimulus payments. Business investment on equipment had solid growth, but was below our expectations. Spending on intellectual property rose very strongly (more than we expected), while purchases of structures decreased (as we foresaw). Our largest error was in the housing sector, where growth was solid but not to the boom levels we had forecast. On the international front, the trade deficit grew far more rapidly than our forecast. This could be a mirror-image effect of the high level of the federal deficit. Finally, government purchases of goods and services grew slowly, which was in line with our forecast, while federal transfer payments were more than $600 billion higher than we expected.

A year ago, the labor market was in a "Tale of Two Cities" situation. It was the best of times compared to the shutdown lows; it was the worst of times relative to the pre-pandemic highs. By October 2020, payroll employment had regained 12.4 million jobs from the low in April--a monthly rate of about 2.1 million. But this still left employment 10 million short of its pre-pandemic level. The unemployment rate dropped by 7.8 points between May and October of 2020 to 6.9%. But this was still nearly double its level in February.

Over the past 12 months (through October 2021), these trends have continued but at a significantly slower rate. On the employment front (see Figure 2) the economy has added jobs at a rate of 481,000 per month, which is about 20,000 below our year-ago expectation.

Unemployment has fallen another 2.3 points (see Figure 3)--to 4.6%, a little lower than we expected. Total...